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Five down weeks stir crash whispers

Commentary: Some top investment letters offer ominous warnings

By

PeterBrimelow

NEW YORK (MarketWatch) — Double dip? Five down weeks has Wall Street whispering about another Crash.

First, a (moderately cheerful) proprietary word. The average recommended stock market exposure among the timers tracked by the Hulbert Financial Digest, as represented by the Hulbert Stock Newsletter Sentiment Index [HSNSI], stood at 24.8% on Friday night. That contrasts with 46.0% last Tuesday, which Mark Hulbert worried, citing contrary opinion, said was “only moderately lower than the 67.2% that prevailed at the beginning of May.”

Mark concluded: “Perhaps the most bullish thing that could happen in coming sessions, according to contrarians, would be for the market to undergo further declines, and that those declines prove to be so discouraging that a majority of the currently bullish market timers decide to throw in the towel.” (See June 1 column.)

Well, at least it looks like this process is underway.

But that’s about the best that can be said. Dow Theory Letters’ veteran Richard Russell is alarmingly ambivalent. On Friday night, he reported that his favorite indicators were still holding up and that “frankly, it’s difficult to envision a bear market in the face of what my PTI [Proprietary Technical Indicator] is doing.”

But Russell concluded: “The whole current mess reminds me a lot of 1929-30. After the crash of ‘29, the stock market roared higher, even as the economy was simultaneously weakening. When the great post-crash rally died in April 1930, the market turned down with a vengeance, and the Great Depression began. …The market is probably now in the process of forming a complex top. If the market now turns down convincingly, we could see the beginning of Great Depression No. 2.”

So it’s also alarming to see him write: “As the economic numbers continue to progressively worsen, this bull market will soon end and be replaced with a bear market. And I fear it could be just as bad as what we saw in 2008 – maybe worse…”

Referring to one of his own favorite technical indicators, Slothower writes: “The real long-term support for the entire bull market is actually at the monthly middle Bollinger Band line at 1,186 [on the S&P 500 Index
SPX, -1.42%
]. A break below the monthly middle Bollinger Band line will bring on a bear market.”

“I believe this is where we are ultimately heading to test this summer. If we do not get QE3-like effort from the Fed to defend this long-term support level, then a full-blown bear market will be in the works once long-term support is breached, as we saw happen in 2008.”

In the short run, however, Slothower has immense respect for what he unflinchingly describes as manipulation by Wall Street and Washington:

“I think it would be a mistake just yet to think the investment banks do not have the power to force another short squeeze on crude-oil prices and equities to leverage the S&P 500 back to its 50-day moving averages again here soon. … While it seems apparent to us that the economy is slipping into recession, the stock market is still largely being propped up by the Fed. While we certainly see a broad market-topping pattern developing here, it may still be premature to think the Fed/investment banks are not going to continue more ‘pump and dump’ sideways-market behavior before QE2 officially ends here at the end of the month.”

But one successful bull is not budging yet. Sound Advice turned opportunely bullish right after the Crash of 2008 and has remained bullish, if occasionally battered, ever since. (See Jan. 20 column.)

It wrote last week: “The bright side, if you are a contrarian, is that the U.S. economy won’t be overheating anytime soon. Yes, that’s a bit sarcastic, but we want to suggest that poor economic conditions are conducive to finding stocks at good prices.”

Sound Advice concluded: “We would not be surprised to see prices fall further. But we’re going to be buying during this period, because ultimately we expect the economy to recover, that jobs will be created and that even housing will stabilize and begin to rise as both speculators snap up cheap properties and real people recognize that it’s becoming cheaper to own than to rent and will overcome their innate fear that prices could fall further.”

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